Sharing Money Creation in a Monetary Union

18 Pages Posted: 3 Nov 2008

See all articles by Stéphane Auray

Stéphane Auray

CREST-Ensai

Aurélien Eyquem

Université de Rennes 1, CREM

Gérard Hamiache

University of Lille III

Jean-Christophe Poutineau

Université de la Réunion

Abstract

How to share money creation among the members of the European Monetary Union? To address this issue, we construct a two-country New Open-economy Macroeconomics model of an asymmetric monetary union with an incomplete financial market and home bias in consumption. We consider two sharing rules consistent with the current regulations of the European System of Central Banks. First, each participating National Central Bank supplies half of the European Central Bank determined money creation in the monetary union. Secondly, each National Central Bank adapts the national increase in money demand, under the constraint that the total money creation in the union does not exceed the level determined by the ECB for the whole union. We show that the current sharing rule, which ignores countries heterogeneity, is superior in terms of welfare. The key role of the current account is emphasized. It proves an efficient decentralized mechanism for allocation of money.

Suggested Citation

Auray, Stéphane and Eyquem, Aurélien and Hamiache, Gérard and Poutineau, Jean-Christophe, Sharing Money Creation in a Monetary Union. Review of International Economics, Vol. 16, Issue 5, pp. 817-834, November 2008. Available at SSRN: https://ssrn.com/abstract=1292029 or http://dx.doi.org/10.1111/j.1467-9396.2008.00750.x

Stéphane Auray (Contact Author)

CREST-Ensai ( email )

15 Boulevard Gabriel Peri
Malakoff Cedex, 1 92245
France

Aurélien Eyquem

Université de Rennes 1, CREM ( email )

7 Pl. Hoche
35065 Rennes Cedex

Gérard Hamiache

University of Lille III ( email )

Domaine du Pont de bois
Villeneuve D'Ascq Cedex, 59653
France

Jean-Christophe Poutineau

Université de la Réunion ( email )

Campus du Moufia
15, avenue Rene Cassin BP 7151 -97 715
Saint-Denis messag cedex 9
France

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